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Shares of solar energy technology provider SunPower (SPWR) are up $1.11, or 3.4%, at $33.67, after J.P. Morgan‘s Paul Coster this morning raised his rating on the stock to Overweight from Neutral, with a $43 price target, writign that a 21% decline in the shares since the beginning of Q3 (so, around July), has made its risk-reward balance more favorable.

Coster sees “catalysts” for the shares. In particular, the company’s annual analyst day event next month.

He thinks investors are interested in the prospect of SunPower forming a so-called Yieldco, an MLP-like structure that is focused on paying out free cash flow as a dividend from a portfolio of solar installation projects.

As mentioned yesterday with respect to First Solar (FSLR), the Yieldco has been a focus of investor interest in solar, helped by the Yieldco spin-off back in July of TerraForm Power (TERP) from SunEdison (SUNE).

In fact, Coster offers an assessment of SunPower’s Yieldco potential based on TERP:

SPWR had 605 MWs of projects under contract at the end of 2Q, which could be used to form a YieldCo (likely higher given 3Q additions), which it intends to build on through 2015. A decision on the potential formation of a YieldCo could be made as soon as the November Analyst Day or as late as 3Q15. Assuming standard industry pricing, we calculate an initial dividend of $50-75mm, depending on capex financing structure. Using TERP’s FY15 trading yield of ~3% as a comp implies a value of SPWR’s YieldCo of ~$1.5-$2.5bn.

Axiom Capital’s Gordon Johnson today asks why shares of First Solar (FSLR) rose more than 15% in the month following its disappointing Q2 report on August 5th, concluding that the rise is based on the mistaken notion the company can sprout a so-called Yieldco, an MLP-like holding company with high payouts to investors.

It can’t, he asserts.

“How can a company so poorly miss the Street’s earnings ests., yet rally ~+15% in a little more than a month you ask?” writes Johnson. Answering his own question, he observes “was an unquenchable thirst for yield at the time, FSLR, after previously downplaying the prospect of it delving into the world of YieldCos, stated that it was now assessing the prospect of launching a YieldCo, with a decision to come no later than the next earnings call.”

Indeed, day-after analysis of First Solar’s report by the Street was heavy with expectation for a Yieldco possibility, similar to the transformation of SunEdison (SUNE) that has boosted that company’s stock 41% this year.

While ”a concrete conclusion is hard to determine regarding whether FSLR can/cannot launch a YieldCo,” Johnson’s review of projects in the company’s pipeline inclines him to think the company can’t deliver the yield investors want.

Basically, the state of projects won’t offer the necessary “cash flow for distribution,” CAFD, the industry metric, to support Yieldco payouts. Here’s his back-of-the-envelope on the matter:

In our analysis, in 2015, we assume FSLR drops down Mopa (250MW AC), North Star (60MW AC), India (45MW AC), and Barilla (22MW AC), or 444MW. Using our $0.10 of CAFD est., as well as our assumed 4.4% dividend yield, this would represent a market cap of $1.010bn and CAFD at the end of 2015 of $44.4mn. Moving on, applying our est. for a minimum investor required dividend growth rate of ≥+10%, FSLR would have to show incremental CAFD of $48.9mn in 2016. Thus, assuming FSLR drops down the bare minimum in projects necessary to achieve this goal, we assume the company drops down Stateline (300MW AC) and California Flats (150MW); this would create an incremental $54mn in CAFD, allowing FSLR to meet its minimum required dividend growth rate of ≥+10%. However, this is when things get a bit “tricky” for FSLR, and why we do not believe the company has the ability to launch a YieldCo at present that has all of the necessary characteristics of existing YieldCos (i.e., minimum $1bn market cap and a clear path to ≥+10% dividend growth for 5+ years out). More specifically, given FSLR doesn’t currently have any projects in 2017/2018 that it is developing yet not sold/contracted, the company would be left with Cuyama (40MW AC), Kingbird (40MW AC), and Lost Hills (32MW AC), or 134MW in total. Thus, assuming these projects were dropped down in 2017, FSLR would only have $13.4mn in CAFD, which would be FAR short of the $59.1mn necessary to grow its dividend in 2017 by the minimum ≥+10%. Furthermore, and even more daunting, in 2019 this would leave FSLR with NO projects available to drop (the company would also have just one project to drop down in 2019, and no projects to drop down in 2020). At risk of stating the obvious, again, barring more projects in FSLR’s backlog/pipeline we are not aware of (we remind our readers that FSLR cannot drop EPC project into a YieldCo as the company does not own these projects), we do not believe investors would be willing to aggressively enter this YieldCo.

Here’s Johnson’s table of the project pipeline for First Solar (click for larger image):

And here is Johnson’s assessment of the hurdles the company must clear to satisfy Yieldco requirements:

Shares of solar panel installer Vivint Solar (VSLR) are up $1.21, or almost 8%, at $17.21, on their first day of trading, after pricing the IPO at $16 last night, the low end of an expected range of $16 to $18.

The company, based in Lehi, Utah, promises to save residents 15% to 30% on their electricity bills “immediately following system interconnection” after installing panels on a home. The company was founded in 2011, and notes in its S1 filing with the Securities & Exchange Commission its evolution from other home services:

We were founded in May 2011 when Vivint, Inc., a residential security solutions and home automation services provider with approximately 850,000 subscribers as of June 30, 2014, recognized an opportunity to replicate its strong direct-to-home sales model in the solar energy market, and in July 2011 we installed our first solar energy system.

Vivint had $6.2 million in revenue in 2013 and $10.07 million in the first six months of this year.

The company had $15.6 million in retained earnings on the balance sheet as of the end of June, and $92.3 million in total stockholders equity.

Vivint may be of interest to investors following SunEdison (SUNE), TerraForm Power (TERP), and NextEra Energy (NEE).

One wonders if at some point the company could transition to a Yieldco arrangement, as SUNE and TERP have.

Several Street observers today today weighed in about what they see as rising demand for solar energy systems, perhaps boosting the outlook for names such as Canadian Solar (CSIQ), Jinko Solar (JKS), and and SunEdison (SUNE).

FBR & Co.’s Aditya Satghare, who has an Outperform rating on China Solar shares, and Market Perform ratings on First Solar (FSLR) and SunPower (SPWR), expects “global project development activity to accelerate,” he writes, driven by “pipeline conversion” in overseas markets such as Japan and Latin America, as well as a speed up in the pipeline in China, the last of which is “the biggest swing factor” for the global market, he thinks.

Satghare takes his cue from remarks by Canadian, Jinko, Trina Solar (TSL) and others about their pipeline development:

Recent announcements from Canadian Solar, Jinko Solar, and Trina Solar point to increased efforts by local players to accelerate their pipeline development either through the formation of JVs or through pipeline acquisitions. While the exact nature of how these projects are capitalized is yet to be determined, the decision will mainly depend on the cost of capital for each individual entity. Since our last publication, cumulative pipelines for the publicly traded companies are up 1.7 GW, from 8.9 GW to 10.6 GW, with Trina Solar seeing the largest increase in its pipeline. With increased disclosure and growth in pipelines, individual company discounts have narrowed with CSIQ, JKS, and TSL to ~74%, YGE ~59%, and JASO getting no real benefit for its pipeline. For Canadian Solar, we see the pipeline discount ranging from 28% to 80% depending on varying stages of the pipeline. For Canadian Solar, we are increasing our price target to $45 to account for modest increases to module capacity and the medium-term pipeline in Japan.

Satghare also sees more activity by comapnies that may follow SunEdison in creating “YieldCo.s” for their pipeline assets:

U.S.-based companies such as SunPower Corporation and First Solar, Inc. have large global pipelines, between 8 GW and 12 GW. SunPower has disclosed its intention to create a HoldCo with about 600 MW, while First Solar continues to evaluate whether to create a YieldCo. It is important to note that value creation from a yield vehicle is highly dependent on growth potential and disclosure on timing of future drop-downs from the parent company. Both SunPower and First Solar will have to increase their disclosure for any potential yield vehicle to trade at an attractive cost of capital.

Another person looking for positive cues from China is Deutsche Bank‘s Vishal Shah, who reiterates Buy ratings on Trina and Yingli Green Energy (YGE), based on his “checks” of China trends and pricing of solar panel modules:

Our checks indicate demand in China has picked up over the past 2 weeks, module prices and utilization rates have been rising and industry participants expect another year-end rush/supply shortage over the next few months. Against this backdrop, we expect solar stocks (particularly leveraged to Chinese market) to outperform the broader market as stronger pricing environment drive positive estimate revisions and multiple expansion [...] Checks indicate that the recently announced DG policy in China has resulted in a strong pick-up in demand which has resulted in ~2c/W increase in module prices in the local market. Most industry participants are now confident of Chinese market achieving the 13GW annual installation target this year, which is a significant positive change compared to just a month ago where most industry participants were skeptical of China installing even 10GW this year.

Quick Comment (from PVInsights): Multi wafer price increases this week due to moderate Chinese demand recovery – Overall module price drops moderately this week. In the US, the price uptrend benefited by US Ad ruling is weakening. The serious depreciation of the EURO and the JPY also negatively affect modules pricing in the USD terms. Chinese module price is stable this week as its domestic demand recovery is not strong enough to boost Chinese module price. As such, module price cut pressure in the US, EU and Japan drags down the overall module price. Overall multi cell price remains stable this week. Chinese domestic demand recovery and the weakening influence of US AD ruling stops multi cell pricing downtrend. On the other hand, overall mono cell price drops this week. Although cell demand in the EU and Japan is stable, mono cells sold in Japan and EU still face great price cut pressure due to serious depreciation of the EURO and JPY. The European and Japanese solar panel makers press for lower cell prices as their purchasing power weakens. Therefore, multi cell price remains stable while mono cell price decreases this week.

Shares of solars were generally positive today, with Canadian Solar closing up $2.76, or 7.4%, to $40.29, Trina up 97 cents, or 7.2%, at $14.47, JinkoSolar up $1.23, or 3.9%, at $33, First Solar up $1, or 1.4%, at $71.69, SunPower up 76 cents, or 2.1%, at $37.60, and Yingli up 18 cents, or 5.2%, at $3.65.

CLSA Americas‘s Ed Maguire, who has been chronicling the various aspects of the Internet of Thingsin a series of reports, this afternoon offered up what he bills as a survey of the IoT “Deep Field,” writing that IT spending on the IoT can total as much as $500 billion by 2020.

The actual deep field report he published today runs 144 pages, incorporating some of the previously published material.

Delving into the Internet of Things (IoT) reveals a metaphorical “deep field” as trained focus on fractional vistas exposes universes of possibility. Connecting the physical world with sensors and analytics will transform daily life and a spectrum of industries. There is opportunity and disruption in semis, components, hardware, networking and telecom. We expect value to accrue to applications, services and analytics. As the “Cambrian explosion” of innovative technologies coalesces over the medium term, the embrace of new data and analytics-driven business models will catalyze a coming demand inflection point. It’s likely that hype will outpace reality over the next 12-24 months, but over three to five years we expect meaningful traction to take hold.

Overall, he sees at some point “an inflection point will follow from new services that harness incremental value from data and analytics,” and is “most optimistic about the value-creation opportunity from industries that are not traditionally IT centric, like manufacturing, energy and agriculture.”

How to invest? Maguire concedes it’s all a “bewildering array of potential winners and losers,” and thinks research firm Gartner‘s “Hype Cycle” illustration is a good way to guess about investment: “Typically, investors would want to buy technologies along the innovation trigger, short at the peak of inflated expectations and buy again at the trough of disillusionment.

Here’s Gartner’s illustration (click on the image to see a larger version):

Maguire has his own favorites in data analytics technology, which he thinks will be important to tie it all together:

From the broad universe, we attempt a preliminary filter to identify global names that we believe will be either major players in the IoT landscape and/or those with business models that will be heavily exposed to IoT adoption. We highlight a dozen top picks for investors below. In software, we believe analytics-related firms are well positioned, particularly Splunk (SPLK) and Informatica (INFA). Salesforce.com (CRM) is an early leader targeting the Platform-as-a-Service (PaaS) opportunity for wearables and industrial applications.

Barclays‘s Ben Reitzestrumpeted an expected entry by Apple into the electronic payments market as a big deal.

Fiber optic networking equipment maker Ciena‘s (CIEN) shares are down $1.88, or 9.2%, at $18.58, after the company beat fiscal Q3 expectations, but forecast this quarter’s revenue below consensus, citing a variety of factors in telecom markets that are causing some hiccups in timing of its revenue from carriers.

CEO Gary Smith, during a phone call I had with him following the report, told me that contrary to what investors seem to think, “You’re not seeing an overall slowdown in the carrier environment,” just some lumpiness based on different carriers’ pace of investment.

Shares of 3-D printer maker 3D Systems (DDD) are down 70 cents, or 1.4%, at $51.13, after Pacific Crest’s Weston Twigg cut his rating on the stock this morning to Sector Perform from Outperform, warning that acquisitions are increasingly far afield of the company’s business, diluting its focus.

And Morgan Stanley analysts Scott Schmitz and Katy Huberty were also lukewarm on 3D Systems, initiating the stock at an Equal Weight rating, writing that Stratasys (SSYS) is the better bet.

But there were other, more positive views on 3D Systems. Canaccord‘s Bobby Burleson reiterated a Buy rating and a $75 price target, writing that the company’s purchase of Belgium’s LayerWise, a service buraeu, will bring more expertise in metal printed objects.

UBS hardware analyst Steve Milunovich endorsed shares of Apple (AAPL), EMC (EMC), and Nimble Storage (NMBL) based on improving trends, pointing to a 17.3% rise in computer orders in July, year over year, according to census data.

Speaking of Nimble, Summit Research‘s Srini Nandury reiterated a Buy rating, and a $40 price target, writing that his industry sources tell him the company is set to introduce a networked-attached storage, or NAS, product in the latter half of next year. Such a product will help extend the company’s product line to 100% of the enterprise storage market, he believes.

Shares of solar energy distribution company SolarCity (SCTY), which is chaired by Tesla (TSLA) CEO Elon Musk, are rising 76 cents, or 1%, at $71.84, despite a cautious note from Morgan Stanley’s Timothy Radcliff, who initiated coverage of the stock with an Equal Weight rating.

Radcliff thinks the company’s got a lot of positives, but the stock already prices in much of the opportunity for solar distribution.

“Under our base case assumption of a 50% contract renewal rate at 50% average renewal price, we estimate retained value in 2014, 2015, and 2016 of $1.8Bn, $4.0Bn and $7.8Bn, respectively,” he writes.

On the one hand, there’s enough opportunity in replacing traditional generation in the U.S. to afford lots of growth in the business for years to come:

Even assuming that fixed charges of 50% of the transmission and distribution (T&D) portion of bills are levied on solar customers, we think the addressable market will support significant growth off of the current residential base of < 4GW. We forecast a 27% CAGR for the entire distributed generation segment between 2013 and 2020, even assuming that the Investment Tax Credit (ITC) steps down to 10% after 2016.

SolarCity is “well positioned,” he argues, noting the company “has built the preeminent solar lease provider in the US,” with market share of “30% of total US residential deployments over the past 12 months and more than 40% of residential leased projects in the US.”

But can it maintain “project-level profitability despite rising competition”?

“Although the company should fare well through 2016, its competitive advantages will likely diminish thereafter,” he writes. “We forecast market share declines of 200bps per year between 2017 and 2020.”

Some of the threat of rising competition could be offset if the company can achieve lower costs through its acquisition of solar cell maker Silevo in June:

If Silevo emerges in the next 3 years as the clear leader in efficiency and / or cost, then the company could mitigate some inherent disadvantages in cost of capital (described above), and probably make a good case for maintaining industry-leading profitability for each watt deployed in the field. The profitability could more than justify the capital deployed in the new technology, and management will have control over an important piece of the supply chain, in a market where supply has swung significantly in relation to demand in the last 3 years.

And in keeping with recent trends in the solar business, Radcliff opines the company may be pushed to create a so-called Yieldco, an entity that milks cash flow of reliable solar projects:

SolarCity has not announced plans to form (or even formally explore) a Yield Co, but we believe the company will face increasing pressure to consider the strategy given the dynamics described above and strong performance of the asset class since its creation in summer 2013 with the IPO of NRG Yield.

Correction: A prior version of this post incorrectly stated that Elon Musk founded SolarCity. He is chairman, but the company was co-founded by CEO Lyndon Rive and CTO Peter J. Rive. My apologies for any confusion caused by the error.

GT Advanced is the operator of furnaces for the preparation of sapphire materials, among other things, and has a deal with Apple (AAPL) to run those furnaces, presumably for use in the forthcoming iPhone.

But Osborne starts the shares with an Outperform rating, and a $19 price target, writing that “While EPS is subdued in the near term as the Arizona Apple factory ramps, we see a clear path to $1.50-$2.00 in EPS by 2016 as end market conditions improve in solar and LEDs, leverage plays out in Arizona and new products kick in.”

Osborne sees multiple uses by Apple for sapphire:

In September, our Apple analyst, Timothy Arcuri, expects a bevy of new products from Apple. He sees a role for sapphire in wearables and high end iPhones (both 4.7″ and 5.2″), according to his conversations with industry contacts. We expect a ramp up in sapphire use relative to Corning’s Gorilla Glass over the coming quarters, especially as the cost reductions play out through incorporating the Hyperion tool set, which is not part of the current production process.

He is also sees positive prospects for the company’s equipment to make solar panel cells after a rocky 2014:

While many in the supply chain are focusing more on project development instead of manufacturing, we expect a handful to add more capacity given likely demand increases and more attractive return on investment from the lower cost of production of new tool sets (DSS, Polysilicon, HiCZ, and Merlin) from GT and others in the industry.

Osborne models GT Advanced making $625.9 million in revenue and 15 cents in EPS this year, versus consensus of $628 million and 11 cents. For 2015, he sees $1.12 billion and 79 cents versus consensus of $1.15 billion and 82 cents.

Amtech is a provider of equipment for both semiconductor and solar panel preparation. Osborne starts the stock at Outpeform as well, with a $15 price target, citing the same increase in solar capital equipment spending as he cited for GT Advanced. He notes that Chinese producers of solar cells are soon going to have to spend more to keep up with production:

We see global demand at 45.5 GW in 2014 increasing to 60.2 GW in 2016 acting as a driver of a capital spending cycle relative to effective cell equipment capacity in the 45-50 GW range currently. While the Chinese have been running at full capacity for a few quarters, they have been outsourcing to Tier 2 vendors in China and to the Taiwanese; however, our checks suggest these vendors are also starting to run at nearly full utilization. While many in the supply chain are focusing more on project development instead of manufacturing; we expect a handful of vendors to make the leap forward to 20% efficient panels.

As for SunEdison, the developer of solar energy projects, he writes that the big story is the move from government subsidies to so-called Yieldcos, spin-offs that promise shareholder payouts that are akin to master limited partnerships (MLPs).

While he sees that as positive, he thinks SunEdison’s stock has already priced in the payoff from its own spin-out, TerraForm Power (TERP), back in July, and he assigns the stock a Market Perform rating, and a $20 price target:

In May, SUNE spun out its semi unit and in July, TerraForm Power, a YieldCo was created. While we applaud the shareholder friendly actions that have improved the cash balance of SUNE in order to allow management to accelerate project development, we see these items as priced in. Our sum-of the parts analysis leads us to a low to mid-20s valuation for the company, with the development company worth ~$16/share, the TerraForm dividend stream worth $3-4 per share eventually and the solar materials and semiconductor units each worth ~$1-2 per share. Adding up these figures, we see a mid-$20′s stock price as stretched. We like the strategy the company has undertaken; however, would be more inclined to get constructive on the stock in the mid to high teens.

Shares of semiconductor wafer supplier SunEdison (SUNE) are up $3.05, or almost 16%, at $22.37, after the company this morning reported Q2 revenue that missed analysts’ estimates, but delivered a surprise profit.

SunEdison reported $557.5 million in non-GAAP revenue, and EPS of 12 cents, compared to the Street consensus of $567 million and a 29-cent net loss per share.

The company projected sales of energy producing systems to rise from 54 megawatts last quarter to 70 megawatts this quarter.

SunEdison said its “project pipeline” at the end of the quarter was higher by 684 megawatts of projected capacity, at 4.3 gigawatts. The company said it completed 218 megawatts of capacity during the quarter, which was toward the higher end of what the company had forecast.

CEO Ahmad Chatila remarked that the quarter was a “transformational period” for SunEdison, including the IPO of two former divisions of the company, SunEdison Semiconductor (SEMI) and TerraForm (TERP), the so-called Yieldco for the company’s projects business.

SunEdison Semiconductor shares are up 4 cents at $16.54, after it reported its own results this morning, with revenue of $214.6 million falling below the average $216.3 million, but the reported profit of 34 cents beating the Street’s expectations for a 39-cent loss.

As with Tuesday evening’s report by First Solar (FSLR), and the analysis the morning after, the discussion this morning on the conference call with analysts turned to the Yieldco, and the possibility for further MLP-like spin-offs. Chatila was asked about those prospects, and remarked,

Our volumes around the world are very very high and they’re growing and we would like to take advantage of that and so we’re thinking about others. We are not ready to announce exact dates but it’s clearly on our mind and it’s not like the last few weeks we start thinking about it. Actually, I would say international vehicle assessment started in January of 2013, so I’ll just tell you we’ve been strategic.

“We acknowledge the best in class disclosure from the management team in terms of pipeline and value creation, and believe that this should set the benchmark for pipeline disclosure in the sector,” writes Satghare.

Update: Shares have reversed course from earlier losses, and are now up $2.06, or 3.2%, at $65.70.

Shares of First Solar (FSLR) are down $1.26, or 2%, at $62.00, after the company yesterday afternoon missed Q2 expectations by a wide margin, as some of its solar energy installations were delayed.

The focus on the call, though, was less on the results, and more on the prospect that the company might spin out some of its business into a separate outfit that acts rather like a “master limited partnership” in the pipeline industry, with investors getting paid a distribution; the prospect is referred to by management and the Street as a “Yieldco.”

On the call, CEO Jim Hughes briefly remarked the company is still evaluating the option but is getting close to making a decision:

Finally, I would like to provide a brief update on our position with respect to a yield co. As we have stated previously, this is an issue we felt needed careful consideration. We did not believe we needed to rush into a decision, but rather take into account the evolving industry dynamics and make the best long-term decision for our shareholders. With that in mind, we are nearing the end of our decision-making process and subject to market conditions we expect to make a final decision near term by the next earnings call at the latest.

Despite the big miss, there are plenty of defenders this morning. Needham & Co.’s Edwin Mok raised his rating on the shares to Buy from Hold, with a $75 price target, pointing out that the company held onto its full-year outlook, which means the “issues was more timing” in the quarter, than a fundamental breakdown in the business.

Like others, Mok is fixated on the idea of the company offering a vehicle for getting paid on the yield:

While a final decision has not been made, we see a high likelihood FSLR will create a yieldco. We believe recent ■ successful launches of others such as TERP [TerraForm Power] and NEP [Neptune-Calculus Income & Growth VC] [both N/R] demonstrate investors’ willingness to own these assets at very low yield. Mgmt acknowledges yieldco lower the cost of capital (a change from Analyst Event), which we believe will allow their Sponsors to be more cost competitive. With a strong developmental pipeline, we believe First Solar could be a very successful yieldco sponsor.

Paul Coster of J.P. Morgan, who has an Overweight rating on the stock, and a $76 price tarot, is also intrigued by Yieldco prospects:

FSLR is nearing the end of its evaluation period regarding the formation of a YieldCo and plans to make an announcement by at least the time of the next earnings call (early November). The company has ~1.5GW of opportunities that are not yet sold and therefore could be dropped down into a YieldCo, 600MW of which are either completed or nearing COD which could be used in an initial YieldCo portfolio. The hurdle for creating a YieldCo is higher for FSLR relative to other solar developers owing to the firm’s relatively low cost of tax-efficient capital and the focus on larger-scale utility projects with well-defined end-customers, however it seems increasingly likely that a subset of the firm’s business could be suited to a YieldCo drop down.

Citigroup‘s Shahriar Pourreza, who has a Buy rating on the stock, and an $87 price target, writes that Yieldco has become a more desirable option now:

Valuation of initial deals has surpassed expectations (on par if not more favorable than MLPs). Investors have gained comfort with non US assets and some currency exposure. There is a public solar YieldCo in the market which reduces market risk of others. The market has reacted favorably to the IDR structure and has gained comfort with accounting issues. Lastly, there is a large growth opportunity available beyond US renewables which creates long term visibility to growth for a First Solar YieldCo.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.